I had an interesting conversation with an agent from another brokerage recently. We’ve been working to bring a transaction together, he is representing buyers who are interested in my sellers’ home. He is legally and ethically obligated to do what’s in his clients’ best interest and I am obligated to do what’s in my clients’.
The buyers and sellers have gone back and forth with offers and counter offers for several days and today they came to an impasse. At least for now, this deal is not coming together.
So what are the factors affecting each parties’ decision-making?
For buyers, the dramatic increase in interest rates is alarming. Rates have risen from 3.22% the first week of January to a 20-year high of 7.08% in late October, as the Federal Reserve works to get a handle on inflation. This has a big impact on a buyer’s monthly payment. For example, on a $600,000 home with 20% down, the payment, excluding taxes and insurance, goes from $2,081 to $3,219!
For sellers, home inventory is still low, it’s still technically a sellers’ market, and showing activity is pretty good — there are a lot of buyers shopping! This encourages sellers and makes them wary about doing large price reductions or accepting lower offers because they don’t want to leave money on the table. And some still have hope that the frenzy of 2021 will come back. Hence the impasse.
So where does this leave agents working hard to help our clients meet their goals? If we’ve been around for a while, we dust off our skills and spend time really understanding what’s important to our clients and educating them on their options. The average agent with less than eight years of experience has only known a market of rising prices, low days on market, sellers receiving multiple offers, and buyers pretty much taking what they could get. They don’t have the skills nor experience to properly guide their clients in this new environment!
For my experienced colleague and me, it goes back to the clients’ motivation. For buyers, do they want a new home? Waiting can seem like the right thing to do if one thinks prices are going to continue to drop. However, how long does someone want to put off their dreams based on the possibility the numbers might improve? Most industry experts predict interest rates will continue to rise through 2023, with some suggesting the 30-year rate could increase to 8.5%. For every one point increase in interest rates, prices have to come down nearly 10 percent in order for buyers to have the same buying power. So while prices may decline, it will likely be canceled out by the increase in rates. Bankrate.com has a great article, with several experts projecting both interest rates and home prices, that provides more detail.
In the meantime, there are many loan programs available that can help while rates are high and expected to go higher. Some programs allow both buyer and seller to contribute toward buying down the buyer’s interest rate, either temporarily or permanently. For some buyers, if they can afford the payment and they really want the home, it may make more sense to bite the bullet now and refinance when rates drop again, which if history is any indication, is likely to occur within the next few years.
For sellers, what is their level of urgency to get their home sold? At what point does the anxiety of staying on the market when the future is uncertain outweigh the potential gain of waiting for a higher offer? When the average homeowner has a record level of equity in their home, at what point does it make sense to bite the bullet, take their gain, and move on? Every seller is different and it’s the agent’s job to ask the right questions and present relevant information to help sellers make a decision that’s right for them.
So for now, we wait. The buyers will wait to see if the sellers end up reducing their price and the sellers will wait to see if a buyer with deeper pockets comes along. In the meantime, my colleague and I continue to gather information and synthesize data to be able to guide our respective clients in the best way possible.
If you’d like to seriously nerd out about all things real estate, give me a call at (208) 327-2127 and we can chat!